An article/tutorial explaining the budgeting process for business owners and freelancers.
Successful Business Budgeting - By Vaughan Jones - ONE Scribe
This article/tutorial deals with the steps needed to successfully draft an accurate budget for a business, whether it is a manufacturing, retail, services, or freelancing business.
Preparing a budget is a daunting task for most people but, following these steps in a structured manner, will simplify it substantially.
Step 1. Hold a management meeting with the accountant and the departments' managers. Draw up a budget plan, setting tasks to be performed by specific people, assigning accountability to departmental managers, setting milestone completion dates, set budget meeting dates and the final completion date, and criteria for the completed final budget.
Step 2. Get the financial statements and detailed management reports for the previous financial year, or the forecast Income Statement derived from the business plan if this is a new business. The Income Statement should have the following columns:
Account name; Total Actual; Total budget; Total Variance; Monthly actual; monthly budget; monthly variance. These monthly columns must be grouped per month for monthly analyses.
The figures appearing in the previous year's operating results, Income Statement, are used as a basis upon which calculations of the new year's budget figures can be done.
Step 3. Analyse the information contained in the Income Statement of the previous financial year, or period.
3.1 Sales. Why is there a variance; what factors could have caused the difference between budgeted figures and actual results? Analyse this per individual product or groups of products, depending on whether you manufacture them yourself or purchase to resell.
3.2 Cost of sales. Why is there a difference between actual and budget? Were the production variances unaccounted for? Analyse this per individual product or groups of products, depending on whether you manufacture them yourself or purchase to resell.
3.3 Analyse your distribution costs variances. Why is actual substantially different to the budgeted figures? Analyse this per individual product and for customer groupings. Analyze this also per individual product or groups of products, depending on whether you manufacture them yourself or purchase to resell.
3.4 Analyse the differences in each of the expense accounts. Why do they differ to th budgeted figures?
3.5 List the best ways in which to deal with each of the above-mentioned in order to set accurate figures for the new year's budget.
3.6 Individually re-cost all your products, using the information gained from 2 above, and remember, this is for the full year ahead. This is why you are doing these calculations for each month individually, as this also covers seasonal variants and differences.
Remember to include:
Cost of products and/or raw materials
Direct manufacturing costs
Freelancers, remember to include the monthly salary that you want to earn.
Direct labour costs
Direct warehousing & distribution costs
Provide an amount for breakage & pilfering
Delivery & warehousing costs
Machinery repairs & maintenance
Consumable stores usage
Step 4. Once these items have been analysed comprehensively, put it all together in a new projected budgeted Income Statement for the year ahead. Analyse this information and reset the projected Income Statement over and over until the profit margins needed will be achieved. Also remember that these figures must tie in with the Projected Cash Flow, also a vital part of planning and budgeting
The entire budget must gel together. One doesn't need the old question of whether there will be enough funds to support the plan. If insufficient funds loom, one needs to consider acquiring a long-term loan to fund the budget.
About the author.
Vaughan Jones is an accountant with 35 years' experience, and he is a writer of books and articles to help the business owners improve the managing their businesses. He also does business analysis and small business management mentoring and training.
Email address: firstname.lastname@example.org
His books are available at:
Copyright 2018 Vaughan Jones - ONE Scribe